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Economic News

Business Investment and Profits Slump in Q2

August 29, 2025
Florence Jean-Jacobs
Principal Economist

Highlights

  • The balance sheet of Canadian non-financial corporations deteriorated in Q2 2025. Profits (before tax) contracted for a second consecutive quarter, falling by an annualized 27.1% q/q (graph 1). Corporate profits now stand 11.9% below their level from one year ago, and 43.7% below their latest peak in Q2 2022.
  • The quarterly decline was driven by a few key sectors: lower crude prices weighed on the oil and gas extraction industry, while lower prices of refined petroleum products drove down profits of petroleum manufacturing businesses. The highly uncertain trade environment negatively impacted profits for motor vehicle and trailer manufacturing – net income before tax shrunk for a second consecutive quarter in the sector. This was only partly offset by a positive uptick in profits for other transportation manufacturing, notably aerospace on higher aircraft demand. Retail trade also posted a quarterly increase in operating profits and net income before tax, with clothing, sporting goods, and general merchandise stores as well as food and beverage stores posting higher profits.
  • On top of this lacklustre profitability picture, businesses decreased their investments significantly in Q2 (graph 2). Real business investment in non-residential structures and machinery and equipment shrunk an annualized 10.1% q/q, reaching its lowest level since the third quarter of 2021. This was driven by a 32.6% annualized contraction in machinery and equipment (M&E), which follows positive frontloading in Q1 (+10.1%). The decline in M&E was widespread, with all categories posting contractions, except computer equipment (see table 1 for details). Investment in non-residential structures was mixed: higher spending on engineering structures more than offset the investment drop in non-residential buildings, but the former may be one-off reflecting specific factors related in the energy sector in Newfoundland and Labrador. Spending on intellectual property was dragged down by mineral exploration and evaluation. 

Implications

April through June was a rollercoaster period for Canadian businesses, with trade uncertainty at the forefront. While a contraction in business investment was expected, the depth and breadth of the decline is notable. It is also likely to have negative ripple effects in the longer-term, if the trend is not reversed in the coming quarters. When broad segments of the business sector hit the pause button on expansion or acquisition projects, hiring typically slows and can even grind to a halt. And if productivity-enhancing investments are delayed, it’s the broader Canadian economy’s competitiveness and growth that is going to suffer.

Looking past some of the very real economic gloom, it is encouraging to see a rebound in R&D spending in Q2, although it only partly offsets the prior quarter’s decline. The sizeable growth of real business investments in computers and computer peripheral equipment is another positive signal in an otherwise negative investment picture.

We expect continuing trade uncertainty with the US to weigh on business investments and profits in the second half of 2025. However, a few factors should help corporations in the coming months. Import costs should ease, with the federal government’s slashing of retaliatory tariffs External link.. Sectoral support from provincial and federal governments should also help those industries hardest hit by the trade situation, while the launch of major infrastructure projects should generate growth opportunities for businesses. Still, we expect profit margins to remain under pressure in the oil and gas industry – as crude oil prices are projected to stay low – as well as in the automotive sector. Given their importance in the Canadian economy, this is likely to impact overall corporate profits in the non-financial sector in the second half of this year. In all, today’s GDP External link. release and lacklustre business investment picture should give the Bank of Canada reason to proceed with further rate cuts.   

NOTE TO READERS: The letters k, M and B are used in texts, graphs and tables to refer to thousands, millions and billions respectively. IMPORTANT: This document is based on public information and may under no circumstances be used or construed as a commitment by Desjardins Group. While the information provided has been determined on the basis of data obtained from sources that are deemed to be reliable, Desjardins Group in no way warrants that the information is accurate or complete. The document is provided solely for information purposes and does not constitute an offer or solicitation for purchase or sale. Desjardins Group takes no responsibility for the consequences of any decision whatsoever made on the basis of the data contained herein and does not hereby undertake to provide any advice, notably in the area of investment services. Data on prices and margins is provided for information purposes and may be modified at any time based on such factors as market conditions. The past performances and projections expressed herein are no guarantee of future performance. Unless otherwise indicated, the opinions and forecasts contained herein are those of the document’s authors and do not represent the opinions of any other person or the official position of Desjardins Group.